Dec. 15 (Bloomberg) -- HSBC Holdings Plc said it has $1 billion at risk after providing financing to funds that invested with Bernard Madoff, whose New York-based money-management firm collapsed last week.

HSBC also has clients in its “global custody business,” who have invested with Madoff, Europe’s biggest bank said today in a statement. “HSBC doesn’t believe that these custodial arrangements should be a source of exposure to the group,” the London-based bank said.

Madoff, 70, was arrested Dec. 11 and charged in Manhattan with a single count of securities fraud in relation to what he called a Ponzi scheme that may have cost investors $50 billion. Madoff’s investors include Banco Santander SA, BNP Paribas SA, Royal Bank of Scotland Group Plc and Nomura Holdings Inc.

HSBC declined 1.2 percent to 724 pence in London trading, compared with a 1.4 percent drop for the FTSE 350 Banks Index.

While U.K. regulators and prosecutors declined to comment on any investigations involving Madoff, an official at the Financial Services Authority said it’s still in the “process of finding out what really went on.”

“We’re working with other regulatory authorities to determine the facts,” said Dan Waters, head of the FSA’s risk and policy group.

The London-based regulator expects the banks it regulates to “understand the strategy of the funds they’re investing in,” Waters said. “If they know those funds are investing in other funds, we expect firms to understand those other funds.”

David Jones, a spokesman for the Serious Fraud Office, declined to comment on a report in the Financial Times that prosecutors are “taking a preliminary look” at the case.

Last Updated: December 15, 2008 12:28 EST